Ford Motor (NYSE:F) announced that it expects record 2015 pre-tax profit. Also, it expects 2016 pre-tax profit to equal or exceed 2015 pre-tax profit. They declared a quarterly dividend of $0.15, which is a 5.01% dividend yield on an annualized basis. A $0.25 special dividend was declared that enhances the dividend yield by 2.09%.
The ex-dividend date is January 27, 2016, with a payment date of March 1, 2016.
The past few years have seen disappointing stock market performance as the stock price has fallen, see chart.
F data by YCharts
The dividend yield has moved higher and is nearing historical levels.
F Dividend Yield (TTM) data by YCharts
Income investors that have a positive outlook on Ford can look at the bonds or the common stock. Bonds are generally considered the less risky than the common stock but carry their own risk. There is the risk of increased interest rates and/or widening of spreads. Corporate bonds generally are traded at a spread vs. a U.S. Treasury issue. The bid-ask spread also may increase - this increases the cost of trading. The current yield on the 3.85% note due 2024 is 3.89% vs. the common stock dividend of 5.01%.
A sampling of Ford bonds is shown below. A complete listing of Ford bonds can be found on the Finra website.
The common stock has a quarterly dividend of $0.15 per share or an annualized rate of $0.60. At the current price of $11.97, the estimated dividend yield is 5.01%. The special dividend of $0.25 increases the estimated yearly dividend income to $0.85 or a dividend yield of 7.10%.
F Dividends Paid (TTM) data by YCharts
The current yield on the 2024 bond is less than the stock dividend yield. The common stock carries greater risk than the bond. Therefore, the dividend yield should be more than the less risky bond yield. The risk profile of the bond declines with the passage of time.
Increase return with options.
An investor seeking to increase the potential return of holding Ford could sell an at-the-money call option. In this case, it would be the $12 strike price. The February 5th $12 call had a bid of $0.37 with the return on the strike price of 3.09% before commissions. The February 19th $12 call had a bid of $0.43 for a 3.59% on the strike price before commissions. The annualized returns would be far higher.
Selling calls would reduce risk by the amount of the premium earned. In addition to the call premium, it might be possible to also capture the dividend income of $0.40, as the ex-dividend date is January 27th. Should the dividend be earned, the return would be increased.
For investors seeking to add to a Ford position, the sale of the $12 strikes might be something to consider. The February 5th $12 puts were bid at $0.52 or a 4.34% return on the strike price before transaction cost. The February 19th puts were bid at $0.60 or a 5.00% return on the strike price before transaction cost. The investor should be prepared to buy the stock with a stock price under $12, after the ex-dividend date.
The sale of the $12 straddle for February 5th would see the investor receive premium income of $0.89 ($0.37 for Call, and $0.52 for Put). The sale of the February 19th $12 straddle would net the investor $1.03 in premiums ($0.43 for Call, $0.60 for Put).
The investor selling the straddle may find that the stock is called before the ex-dividend date and is put the stock after the ex-dividend date.
The investor seeking dividend income might wish to consider the common stock of Ford. Also, Ford investors seeking a yield boost or to increase their position may wish to explore the use of call and or put options.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.